Understanding the Technology Distribution Business

Transcription

Understanding the Technology
Distribution Business
A Guide to Optimizing Partnerships and Bottom-Line Value
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
Based on Independent Research Conducted by VIA International
About this Report
Priming Your IT Distribution Business / Overview
The Global Technology Distribution Council (GTDC) commissioned the independent
development of this guide to help all types of companies optimize business and
partnership with IT distributors throughout the world. Whether you are interested in
or already partnering with distributors, the content and analysis here can make a
profound difference.
VIA International, a leading management consultancy exclusively focused on marketing,
distribution and sales channels, objectively researched and produced all of the analysis
and recommendations provided here. Their deep understanding of the technology
channel business is based on 20 years of experience working closely with distributors,
vendors and solution providers across all markets and product categories.
Although the authors and GTDC cannot assume responsibility for the outcome and
impact of decisions made based on information within this guide, your distribution
industry results will likely be far more successful when corresponding best practices are
regularly and methodically leveraged or integrated as part of a comprehensive channel
business strategy.
Learn More
For more information on VIA International or the GTDC – an industry consortium of IT
distributors driving more than $100 billion in annual worldwide sales – we encourage
you to visit us online at: www.viaint.com and www.gtdc.org, or click here for detailed
contact information.
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Table of Contents
Introduction
Here’s a complete perspective on who will most likely benefit the most – and how – from
the deep analysis, best practices and other recommendations covered in this guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Role of the Distributor
Wherever you see a need or opportunity for IT distribution, it is critical
to understand that most successful models are based on mutually beneficial partnerships. Build on a solid
foundation that leverages what distributors do best . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
How the Distributor Business Model Works
What are the primary levers and factors that
come into play when establishing or growing your partnerships with IT distributors. Not all are created equal,
but certain factors and considerations apply across all types of distribution models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Margins and Profitability
Think you know it all when it comes to such fundamental aspects of
doing business with distributors? Take a closer look to potentially validate what you already assume – or shed
new light on how distributors view margins and profitability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Working Capital
Managing the three components of working capital – inventory, receivables and
payables – is of paramount importance to distributors. Do you operate with a full appreciation of these
elements and how your business decisions impact them? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Productivity Measures
Are the odds “SKU’d” in your favor? Delve into the pluses and minuses on
this front based on the portfolio of products you offer and where they fit from distribution point of view: Winners,
Traffic Builders, Sleepers or Losers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Sustainability Measures
Distributors use a number of top-level metrics to measure both their own
business and the contribution of vendors to their performance. Where are you in the mix? Do you know the
success formulas and how they can yield more ideal results?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Managing Growth
It’s a good problem to have – do you already have it or wish that you did? Zero-in
on a simple way to quantify how the size, profitability and working capital efficiency of a business can
determine how much growth a distributor can finance from its own resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
How to Sell to Distributors as a Vendor
Begin with knowing your distributor’s strategy, value
proposition and most important metrics they routinely evaluate. See definitive examples that can increase
your company’s value in distribution and vice versa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Value of Distribution to a Vendor
Market access, reach, coverage, channel building…
these are typically the key factors in the value equation for IT vendors. Get beneath the surface and tap the
“new value” of IT distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Five Myths of Distribution . . . . . . . . . . . . . . . 10
What are your perceptions? Are they changing – for better
or worse? It’s time to clear up any misconceptions. We
give you the definitive view while helping you concentrate
efforts on the core advantages that IT distributors enable.
Nine Things Vendors Do That Make
No Sense to Distributors . . . . . . . . . . . . . . . . . . 40
Have you ever committed the same offenses – perhaps
repeatedly, at least in the distributor’s eyes? Avoid the pitfalls,
and get to the bottom of what your distributors may view as
incomprehensible actions that should change.
Introduction
Here’s a complete perspective on who will most likely benefit the
most – and how – from the deep analysis, best practices and other
recommendations covered in this guide.
Primary Target Audiences
Why this “Primer” was Developed
This “primer” is intended for anyone within a vendor
organization whose role touches technology distributors.
If your role and responsibilities involve determining the
role of distribution in your channel mix, managing
relationships with distributors or designing programs
that involve distributors or indeed their value chain or
ecosystem, then this booklet should be useful.
Members of the GTDC and leading edge suppliers into
technology distribution saw the opportunity to broaden
understanding of distribution – its role, benefits and
business model – among the vendor community. This
content is intended to provide everyone who interacts with
distribution a common understanding of how the core
distribution business model works. Obviously, there are
many variations of the business, but the underlying model
is common. The information will allow both supplying
vendors and distributor personnel to master the detail of
the business model and provide them a common language
and understanding of how to work successfully together.
If you are a vendor partner account manager, partner
business manager, channel manager, sales manager,
or program manager, you need to understand the way
your distributor’s business works and to be able to
demonstrate the commercial value of your relationships
with distribution. In all cases, there is some aspect of
your role which involves building business through
distributors. Just as with any other channel partner,
understanding the distributor business model is critical:
• It allows you to play an effective role as trusted business
advisor to your partner
• It gives you insight into the levers available to you and
how to connect your value proposition to those levers
• It provides a perspective on the model inside your partner:
- Showing how the business model for your
products/services looks inside their model
- Allowing you to understand the role you as a vendor
play within their business: are you a drag or an enabler?
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Back to Table of Contents • 4
Wherever you see a need or opportunity for IT distribution, it is critical
to understand that most successful models are based on mutually
beneficial partnerships. Build on a solid foundation that leverages
what distributors do best.
For most major technology vendors, distribution is their
principal route to market, typically representing as much as
80% of their revenues, with distributors playing a key role
in providing extensive market reach and coverage. The
value of this role grows exponentially in fragmented
markets, even more so in emerging markets which may be
new to vendors. Wherever the vendor sees a role for
distribution, it is important to understand that the most
successful model is one of partnership, whether optimizing
joint supply chains in mature, consolidated markets, or
sharing credit and business risk in more fragmented,
emerging markets.
Role for Customers
Distributors serve a huge range of customers on behalf of
vendors. These customers range in size from small,
independent resellers to large multinational retailers, but
all have the common requirement of a “one-stop shop,”
where they can source products and services from the
hundreds of suppliers whose products are part of their own
offering to end customers.
It is more efficient for these “final-tier” players to be able to
work with a limited number of distributors with whom they
can establish trading relationships that meet most of their
needs. And on the distributor side, there are a number of
services they can offer which leverage their own economies
of scale – either as part of their core offering or as optional
services their customers can choose to use. See the table
at right.
The distributor plays a critical role in selecting the right
vendors and products to enable this one-stop shopping
and to facilitate customers’ business growth. Core to this
element is availability: the distributor’s ability to provide a
significant proportion of products on demand, saving many
of its customers the need to carry stock themselves. IT
distribution is particularly strong in this domain, providing
same-day shipping of thousands of SKUs to customers
who are widely dispersed across geographies.
The second key role performed by distribution – for both
customers and suppliers – is that of breaking bulk: in
simple terms receiving truckloads and pallets of product
and breaking them down into quantities that are closer to
the requirements of end users, of resellers or of individual
stores in a retailer’s portfolio. Effectively, many of the
distributor’s customers are trading “back-to-back,” i.e.,
buying in the small quantities required by individual end
customers, often shopping around on price and availability
and placing their orders after trading off convenience, cost
and credit.
The provision of credit is a core benefit from distribution,
allowing customers to supply, configure and install products
without having to finance their entire work-in-progress and
receivables from the end customer. These are significant
sums where products are incorporated into resource-intensive
solution-based projects which cost many times more to
deliver than the price of the products themselves. In the
case of resellers, this working capital liquidity is often
multiplied by sourcing from multiple distributors in order to
Key Distribution Facts and
Figures (North America)
• 5 Billion+ of credit extended to the
IT channel each year
• 5 Million+ inbound calls annually
• 2 Million+ configurations annually
• 50,000+ individual customers monthly
• 150 Million+ items shipped each year
• 100 Million+ software licenses
managed annually
Source: North American GTDC Member Data
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benefit from multiple credit lines. For retailers, on the other
hand, distributor credit lines allow them to finance their
inventories, which when combined with the cash payments
from consumers leaves them with a cash-positive business.
The final “classic” role attributed to distribution is the
provision of delivery logistics. With very few exceptions,
most customers rely on the distributor to deliver their
orders either to their own business premises or, in many
cases, to their customers’ premises in the form of a “drop
shipment” (which can also carry the reseller’s brand on
labels and packing slips). Where products are out of stock
or not carried as standard, the customer expects the
distributor to order them from the vendor and ship them
once they arrive. Gauging the right level of delivery charge
to levy – recovering as much of the cost as possible while
not alienating customers – is a key challenge for
distributors. One mechanism which helps distributors
manage this to the customer’s advantage is order
consolidation, where delivery charges for all can be
minimized by waiting until a complete order of products
from different vendors is ready to ship. Additional services
of this type take consolidation to the next level: for
value-added resellers, for example, this might include
managing the coordination of multiple suppliers, products
and locations over the lifetime of a project.
For many resellers in most markets, distribution is also the
main provider of pre-sale technical support, particularly
for the constant stream of innovative new products
generated by the IT industry. Such support ranges from a
simple “what is the difference between product X and
Product Y, what are the specs and does it work with other
components?” through to more complex configuration
questions. Post-sale, this can take the form of troubleshooting
or resolving mis-supply and configuration issues, or of more
comprehensive post-sales support or technical training.
Linked to technical support is a range of what are
effectively outsourced product marketing services,
extending from the production of simple product marketing
collateral – whether physical or virtual – through activities
which allow the distributor to leverage their scale such as
full catalogue production or website provision on behalf of
their customers.
Finally, it is important to recognize the more strategic role
played by distributors in providing customers with market
and business intelligence, enabling their resellers to
make smarter strategic decisions and facilitating the growth
of their businesses.
Over time, as technology distribution has matured, more
and more of the standard services have been built into
the margin on the product, with frequent innovations by
distribution to create augmented services and add new
sources of profitability.
Typical Core Offering and Optional Services
Distributors Provide to their Customers
Typical Core Offering
Typical Optional Services
• One-stop shop – range and availability
• Sourcing of products
• Back to back ordering
• Simplified supply logistics
............................................................................
• Bulk breaking
• Consignment stocking
• Repackaging
............................................................................
• Credit
• Extended credit, project finance
............................................................................
• First level technical support (pre-sales)
• Second-level technical support (post sales) –
effectively acting as an outsourced provider of support
• Technical training
............................................................................
• Logistics – delivery
• Logistics – drop shipment to ultimate customer
............................................................................
• Order consolidation
• Project management – coordinating the supply of
several suppliers and shipping to multiple locations
............................................................................
• Product information collateral
• Marketing services – effectively acting as an
outsourced provider
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Role for Vendors
Mirroring the roles distributors play for their customers are the
roles they play for vendors. Ultimately, their role is as a route
to market for vendors seeking to reach a specific segment
of the market or an entire market. In broad terms, this role
translates into activities in four main areas (See table):
Market Knowledge and Access – Distributors provide
vendors with detailed knowledge about the specific
markets in which they operate. Building a relationship with
a distributor in a given market brings not just a set of
relationships with resellers within that market, but also a
wealth of insight into how to use those resellers to access
the different parts of the end customer base. This role is
usually backed up with reporting: sales out and inventory
reporting, updated weekly or daily, provide a key window
onto the marketplace for vendors. In addition, distributors
may provide data on the state of the market, on the
competitive environment, on lost sales, and similar.
Demand Generation & Outsourced Front Office – One
main way in which distributors can leverage their market
knowledge is in demand generation activity, working their
existing network of resellers, recruiting new resellers, and
actively driving awareness and sales capability amongst
them in order to promote sales amongst end customers.
For vendors, the market data, marketing tools and
marketing resources a distributor can make available
provide a highly efficient mechanism for generating
demand for their products, and are therefore an attractive
investment for market development funds. However,
beyond these fundamental aspects of demand generation,
distributors can also provide more extensive front office
services, either supporting a local office in a new market
or taking on the local agent/vendor representative role,
providing channel development and account management
services, running end-customer marketing or
lead-generation/management programs, or administering
channel programs and funds on behalf of the vendor.
Typical Core Offering and Optional Services
Distributors Provide to Vendors
Typical Core Offering
Typical Specialized Services
• Market knowledge and access
• Market knowledge and access
- Sales out reporting
- Channel research
- Channel intelligence
- End-customer research
........................................................................................
• Demand generation
• Demand generation
- Channel recruitment
- Channel account management
- Channel accounts and database
- Program management
- Marketing fund deployment
- Co-op fund management
- Special pricing management
- Special channel financing and credit offerings
- Teleweb outbound/inbound sales
- End-customer marketing and
- Regular marketing mailings
lead generation programs
- “Spiff” sales promotions
- Conference and exhibition services
- Channel conferences
- Channel training
- Channel financing through credit provision
- In-market product management
- Front-line technical support
........................................................................................
• Supply fulfillment
• Supply fulfillment
- Bulk breaking
- Consignment stocking
- Outbound Logistics
- Vendor managed inventories
- Reverse logistics
- Vendor stock warehousing
- Channel credit risk
........................................................................................
• Outsourced services
• Outsourced services
- Warranty management
- Break-fix operations
- Second level and post-sales technical support
- In-market representation
- Trademark registration & protection
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Supply Fulfillment & Outsourced Back Office –
Complementing the demand distributors can generate is
a set of supply fulfillment activities they perform on behalf
of vendors. With the extensive range of SKUs from most
IT vendors, distributors perform a key role in stocking a
complete or close-to-complete range of SKUs on the
vendor’s behalf, and assuring back-orders are handled
promptly where SKUs are not in stock. With price volatility
a common industry condition, the costs of holding this
inventory can be high, in particular where vendor special
pricing into the channel is not backed up by price protection.
The distributor’s role for vendors regarding these SKUs
mirrors that played for customers, i.e., breaking bulk,
providing delivery logistics, and providing reverse logistics
(e.g., taking back returned products), where required. In
addition, they may provide additional services related to
fulfillment, such as vendor stock warehousing, dedicated
vendor inventories for major retail customers, or
consignment stocking on behalf of vendors.
As highlighted in the section relating to customers, a second
core fulfillment function of distribution is to take on and
manage on the vendor’s behalf the significant credit risk of
thousands of reseller and retailer customers. This is a role
which requires the application of all of the distributor’s local
market insight to a set of rigorous credit control processes
to minimize credit exposure and the cost of bad debts. In
addition to the costs saved by having a single, simple
credit function for the vendor, it is clear that there is real
value in managing this credit exposure: the more risky the
market or market segment, the greater value to the vendor.
Additional back-office functions distributors perform beyond
credit management include the running of debit notes,
providing quotation support, and managing pass-through
funds on vendors’ behalf (often advancing funds).
Outsourced Services – Finally, there are other more
specialized outsourced services which IT distributors
provide, including warranty management, break-fix,
post-sales support, or specialist legal services which
leverage local knowledge, such as trademark registration
and protection.
Different Business Models
for Different Roles
Which of the sets of services above a distributor actually
provides to a vendor – the exact nature of the distributor’s
“route to market” role – depends on a range of factors: the
presence of the vendor in the marketplace, the segment of
the market being addressed, the maturity of the product
categories in question, the stage in the product lifecycle
and the nature of the final-tier in the marketplace and
distribution system. In simple terms, there is a spectrum of
(overlapping) services a distributor may provide, ranging
from Value-Added Services through Broadline Services to
Spectrum of Distributors Defined by Business Model
High
Value-added distribution
Broadline distribution
Margin
Fulfillment distribution
Low
Low
Revenue /Volume
High
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Fulfillment Services, which can be mapped by margin and
volume, and which often relate to the position of the product
category on the Technology Adoption LifeCycle (TALC).
Value Added Distribution Services –Typically focused
on taking to market newer, higher-value technologies such
as data centers, virtualization, secure networking and
Open Source and supporting services delivered to larger
and Enterprise-level customers, Value Added Distribution
services involve recruiting, developing and supporting the
specialist final-tier players who reach and service this end
of the market, typically by planning and delivering complex
IT projects. This, in turn, requires significant investments of
time and resources in mastering products from a technical
and marketing perspective, and in building infrastructure
for services ranging from demand building, proactive
sales, consultancy, extensive technical and sales training
and certification, coupled with comprehensive pre- and
post-sales technical support. With investments of this
nature, significant numbers of highly-skilled, high-cost
personnel, and an overall lower volume of sales,
distributors providing Value Added Distribution services
look to earn high margins and to receive compensation for
the services they provide.
Broadline Distribution Services – Providing the
mainstream market coverage to allow vendors to access
and service dealers who address the vast SMB segment,
distributors who provide Broadline Distribution Services
need to cover most or all of the channels vendors need by
establishing and supporting trading relationships with a full
range of dealers within each segment. Market access is
clearly core to the offering, along with the provision of
proven marketing and communication tools such as
catalogs, mailers and websites. With several providers of
these services in each market, this marketplace is typically
highly competitive, with prices and margins under greater
pressure, meaning that process efficiency and cost control
are essential, along with the volume discounts and rebates
which reward scale. As a result, the additional costs of
activities such as placement in marketing tools or sales
promotions will typically be recovered from suppliers since
they cannot be absorbed into the normal trading margin. In
addition, given the scale of such a business, efficient
management of working capital and cash is key, with the
role of credit provider often extending beyond product into
the domains of marketing and promotional funding. Scale
is key, both for the distributor offering these services and
for the supplying vendor.
Fulfillment Distribution Services – In markets where
products are bought rather than sold, such as consumables,
or where other players drive marketing and sales activity,
such as retail, distribution performs the role of logistics
engine on behalf of the vendor. With the vendor or final-tier
retailer taking on most of the marketing activity, the core
of this model is a high-volume, high-efficiency logistics
operation, focused on stripping out any redundant cost in
order for margins to cover infrastructure and operating
costs. In many respects, this model is comparable to that
of a pure logistics provider such as FedEx or DHL, with
two major differences: first, the distributor providing these
services typically bears a stocking risk, leveraging their
expertise in inventory management to balance demand
and supply; second, the distributor also bears the credit
risk. In this model, compensation can be either through
trading margin as in other models or on a fee-per-transaction
basis which reflects the fact that the distribution and
handling costs are standardized and unrelated to the
selling price.
Logistics and Special Service Distribution – The final,
hybrid model, blends elements of all three models above
into special service distribution. In domains such as
telecoms, distribution may combine high-value
configuration services with pack-out and branding
services, repair and refurbishment with retail store
fulfillment, category and shelf management.
Which of these roles your distribution partners play for you,
and which services they provide, will determine the exact
nature of their business model. This primer will not go into
detail on how the business model varies for each type of role,
although that may be the subject of future GTDC publications.
Future Roles, Evolution and the Cloud
As markets and technologies evolve, new roles for
distribution are emerging and will continue to emerge.
Although the core roles will remain, it is likely that
disruptive technologies and discontinuous developments
(such as cloud computing) will once again lay down the
challenge for distributors and vendors of defining how the
distribution role – and therefore business model and
compensation model – will need to change.
What Does This Mean for the Vendor?
Each of the roles and services listed above has an impact
on the distributor business model: the choice of whether it
is provided or not, and to what degree, is determined by
the specific role the vendor is looking for the distributor to
play. As such, it is reflected in vendor contracts, in margin
structures, in compensation schemes and in activity-based
fees. The challenge for vendors is to be clear on what is
required of distribution, which distributors are fulfilling the
requirements and to what degree, and how that activity is
to be compensated.
Ultimately, anyone in a vendor organization who needs to
justify the use of or quantify the value of distribution, should
work through these checklists – from a customer and a
vendor perspective – and answer the question “Which of
these activities do I need performing, which of them should
my distribution partners perform for me, and what would it
cost my own organization to provide these services?”
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Five Myths of Distribution
1. I’m Giving Up Margin to the Distributor
Vendors often feel that by going to market through distribution they are giving away margin that they could
have kept for themselves. However, this perspective completely ignores the fact that the vendor is also giving
up the logistics and credit infrastructure that it would need to deploy to reach the resellers and retailers served
by distribution. The recent cost study conducted among vendors by the GTDC shows that the economies of
scale achieved by distributors means that the vendors are making cost savings which are considerably higher
than the 3 to 5% average additional discount given to distributors
2. Distributors are Just Order Takers
There are very few products that have such strong brand strength and channel profile that the distributor’s
role can be restricted to simply taking orders for them. Most products need some level of pre- and post-sales
technical support, depending on where they are in the technology adoption life cycle. Distribution plays a vital
role in ensuring the resellers are fully informed as to the technical specs of products as well as advising on
configuration issues and compatibilities. Without this role, many new technologies would move far more slowly
through the adoption cycle and resellers would struggle to realize their business potential.
3. The Internet/Cloud has Removed the Need for Distributors
Distributors generate and respond to demand from thousands of resellers of all types, providing a one-stop-shop
across hundreds of different vendors. While the migration of information to the Internet and the provision of
services through the cloud make these transactions ever more efficient and lower cost, there is no substitute
for the specialized skills and capabilities of distributors to drive the sales and fulfillment processes. With the
exception of software, IT products require a physical logistical infrastructure, and all products need a credit
infrastructure backed by the financial strength and credit insight of distributors to provide the liquidity needed
by the channel at the lowest cost.
4. Retailers and Large Resellers Prefer to Deal Direct with Vendors
While it is certainly true that large retailers and resellers want to have a direct relationship with the key
vendors, this does not automatically mean that they want the vendor to handle all aspects of the trading
relationship. Most retailers have such demanding logistical requirements that they insist on distributors
handling the supply chain and providing the related transaction processing infrastructure, including of course
credit provision. Large accounts want the ability to connect with vendors at a strategic level backed up with
day-to-day account management connections to be able to resolve issues with the right level of priority. In
some instances the vendors will also deploy sales support that works directly alongside that of the resellers to
develop end-customer relationships and win big or complex deals, but project management and fulfillment will
go through distribution.
5. Distributors Move You One More Step Away from Market Signals
Although this might have been true twenty years ago, most vendors now have on-line visibility of “sell-out” data
from their distributors through the integration of their IT systems, giving them at least weekly, if not daily or live
visibility of market signals. This is to the benefit of both vendors and distributors, ensuring that the supply chain
is as lean as possible while holding sufficient inventory to meet demand.
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What are the primary levers and factors that come into play when
establishing or growing your partnerships with IT distributors. Not all
are created equal, but certain factors and considerations apply across
all types of distribution models.
Characteristics of IT Distribution
Given the roles fulfilled by distributors for both customers
and vendors, there are some key characteristics to be
aware of in the distribution business model.
First, distribution is an inherently difficult business to get
right. The fixed costs involved are typically long term, while
the visibility of revenues is just the opposite. Distribution
businesses are often critically dependent on a very few
major relationships, which can change – and be changed –
with relatively little notice. For example, a decision by a
market-leading vendor to switch to supplying just one or two
major customers directly rather than through distribution
can have a significant effect on its distribution partners,
removing significant revenues – and the linked profits
which were covering fixed costs. Clearly, distributors
manage their exposure to such situations, and develop their
‘next tier’ customers, but there is still a short-term impact.
Second, distribution businesses are fast-moving businesses,
consuming significant amounts of capital, or people, or both,
and in many cases delivering – or perceived as delivering –
relatively low returns on these investments. They are
essentially product businesses, and as such they need to
be managed in terms of both profitability and asset efficiency.
A Disti Co - Summary Financial Statements
Profit & Loss Account
Balance Sheet
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Distribution Business Model
To understand this in more detail, it is worth looking at an
example set of distributor financial statements (Profit &
Loss Account or Income Statement, and Balance Sheet)
Focusing first on the balance sheet (a summary of the
assets and liabilities of the business at any given point in
time), it is important to note the importance of three numbers:
• Inventory
Products held for resale
• Accounts Receivable
Amounts due from customers for sales made on credit
• Accounts Payable
Amounts due to suppliers for products bought on credit
These three items make up the working capital required
by the distributor, so called because it is the capital
needed at any point in time to operate the business (as
opposed to capital which may be required to finance the
infrastructure). Working capital is calculated by adding
inventory and accounts receivable and subtracting
accounts payable. The other items in the balance sheet
such as fixed assets (land, building, warehousing and
sales systems, etc.) and other balances are relatively
unimportant – it is working capital for the most part which
determines how much capital a distributor needs to raise
to finance its business. Managing working capital is a fine
balancing act: too little and the distributor risks stock-outs
(running out of inventory) or defaulting on payments to its
suppliers while waiting for payments from customers; too
much, and the cost of capital – especially the interest paid
on any financing – damages the profitability of the business.
The income statement (a summary of the distributor’s
incomes and expenditures over a given period of time) –
demonstrates how tight the margins can be in IT
distribution. The gross profit margin is the difference
between the price the distributor pays for its products (the
cost of sales) and the price it receives for them from its
customers (sales). In distribution this is typically a very
small number between two very large ones, which explains
why it is such an area of focus and the subject of so much
negotiation. In addition, the distributor has to pay for all its
overheads (or SG&A) out of this gross profit, leaving
whatever is left over as an operating profit. But that is not
the final cost to the distributor: as highlighted above, any
capital borrowed to finance the business incurs an interest
charge, which is also deducted from the margin, leaving a
net profit (or loss) to the business. After tax is deducted
(assuming this is a profit), whatever is left is available to be
paid out as a dividend or retained in the balance sheet to
finance the bigger working capital balance or additional
assets required to grow in the next trading period.
Comparing the gross profits made in this example of
$1,008m with the working capital required to generate it of
$1,775m ($1,408m + $1,897m – $1,550m) highlights the
key challenge for distributors: our example company has
tied up over $1.75bn over the year in order to earn just
over $1bn in gross profit … and only $44m in net profit! A
slim return for such a large outlay.
What’s more, the slightest slip in managing this business (for
example, overstocking leading to writing down the value of
inventory, extending credit to bad- or non-paying customers
or investing too soon in additional warehouse space) can
wipe out that profit very quickly and turn it into a loss.
The Distribution Balancing Act
Long-term survival Value Creation
Sustainability
Gross margin return on working capital %
Gross margin return on inventory investment %
Return on Capital Employed / Return On Invested Capital
Profitability
% Gross margin $
% Contribution $
% Net margin $
Working capital
Capital turn X
DSO, DPO, Inventory
Earn (Margin Management)
Turn (Asset Management)
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Managing Distribution is a Balancing Act
This balancing of profitability and working capital is the
essence of the distributor business model. Ideally, each
distributor will have a balance which is right in the context
of its value proposition, its mix of the services we referred
to earlier and its business model. Each will be pushing to
maximize margins and minimize working capital, without
affecting the range and availability of products they are
offering to customers.
In their margin management, most astute distributors use
a portfolio approach to blend fast-moving, low margin
products with slower-moving but higher margin ones. Their
challenge is to match their range and inventory levels with
the demands of customers and vendors, all in ways which
make sense financially. The 80:20 rule applies throughout
the business, with 20% of their products making up 80% of
the volumes … but the probability is that a different 20% of
products account for 80% of profits. Similarly, a small set
of customers may drive the bulk of revenues, but it is vital
for the distributor to know which 20% of customers drive
the bulk of their profits.
Optimizing profitability also requires tight overhead control,
with many of the distributor’s costs being fixed in nature
(i.e., not varying directly in line with sales). This means that
growth often requires step changes in costs, where the
challenge is to avoid pushing up the cost base before sales
have grown to cover it – perhaps easier to do when adding
new warehouse space (timeframe of months) than
investing in new IT systems (timeframe of years).
Conversely, in times of downturn, technology distribution
has been forced to look at ways of making its cost base
more variable by outsourcing elements of infrastructure
such as warehouses, transport … in some cases even call
centers. Such decisions involve tough trade-offs between
the advantages of greater cost flexibility and the risks of
losing control and damaging customer satisfaction.
Managing working capital in distribution is all about
managing a finite resource: money tied up in product A is
not available to stock product B; cash expected from
customer X is not available to extend credit to customer Y;
vendor credit limits need to be paid off when reached,
before more products can be ordered. In stable periods,
Value Levers: Where Distributors Create and Lose Value
Value Created/
Lost
Net Profit
Capital Employed
Operating
Profit
Interest
Other Assets
& Liabilities
Net Current Assets
Gross Profit
Overheads
Logistics/Fulfilment
model
Sales
Cost of Sales
Back-office
model
Customer base &
Value proposition
Vendor & product
portfolio and mgt
Demand generation
model
Marketing & sales
strategy
Services portfolio
Cost management
capability
Working
Capital
Weighted Average
Cost of Capital
Other current
Assets/
liabilities
Payables
Receivables
Working
Capital
Management
disciplines
Inventory
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The second option – accelerating the working capital cycle –
presents its own challenges: tightening customer credit can
lead to loss of sales short-term and customer relationships
long-term; reducing inventory levels can result in poor
availability, stockouts and incremental costs associated
with managing and fulfilling back orders; and asking
suppliers for extended credit terms or increased credit
limits – can send the wrong message, quite apart from the
risk of being met with a refusal.
this requires careful management. In times of growth, the
additional working capital required presents the distributor
with two blunt options: either increase the working capital
to match increased trading volumes or improve the
cash-to-cash cycle, i.e., the time it takes for money paid out
to suppliers for products to convert from inventory into sales
on credit to customers who eventually pay for the products.
Taking the first option without careful planning can be
extremely dangerous: even with sales and profits growing
rapidly, the distributor risks “overtrading,” i.e., doing more
business than their capital resources will allow, and
ultimately running out of cash. This lack of liquidity has
been the downfall of many IT distributors in industry
growth periods.
The Measures that Matter and
How to Manage with Them
The measures that matter in a distributor reflect the way
the business model works, with tight management of
margins, working capital and productivity metrics
Value Creation Tree for a Disti Co – Year 1
Value creation
-$48
Net Operating
profit after tax
0.2%
$40
-0.2%
Return on
invested capital
2.8%
Operating profit
$56
Gross profit
$1,008
Revenue
$19,316
100%
5.2%
$4,129
Overheads
4.9%
Cost of Goods
Sold
$18,308 94.8%
Cash
Fixed assets
$401
Cash
$401
Payables
$1,550
28
Receivables
$1,897
6.20%
$423
Inventory
$1,408
WACC
Excess cash &
non int liabs
$2,715
Total Assets
0.3%
$952
Invested
capital
$1,414
36
Other current
liabilities
$764
Payables
$1,550
31
Working capital
$1,755
33
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(combined margin and working capital) being key to the
success – or even survival – of the business.
It can be helpful to view these numbers in the framework
of a “tree” or pyramid, where the drivers of each side of the
equation – Profitability and Asset efficiency – can be
mapped in a way which shows their impact on the overall
return on investment or the value created for shareholders.
This view of a distribution business highlights the fact that
any change to the key drivers – however small – ultimately
has an impact on the performance of the company. From a
vendor perspective, it is essential to understand this
picture, since every vendor action – adding SKUs,
changing prices, offering a given set of T’s & C’s, running a
promotion – will affect one or more of these drivers and
therefore have an impact on the overall results-.
For our example distributor, A Disti Co, we can map the
financial statements in a similar fashion, showing the
principal metrics essential to the running of the business
and how they relate to each other.
Ultimately, then, the distributor’s business must generate a
Return on Capital. There are a number of key drivers:
profitability, working capital and productivity. The next
sections explore each of these three areas in turn, before
going on to examine measures of longer-term
sustainability and growth capacity.
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Think you know it all when it comes to such fundamental aspects
of doing business with distributors? Take a closer look to potentially
validate what you already assume – or shed new light on how
distributors view margins and profitability.
Margins – % Versus $
Gross Margin %
Gross margin % =
Sales – Cost of sales
Sales
X 100
Gross Margin
Gross margin is the simplest measure of the value add of a
distributor, since it measures the difference between the price
obtained from customers and the price paid to suppliers.
For our example A Disti Co distributor, the gross margin is
$1,008m/$19,316m x 100 = 5.22%. Note that gross margin
is the gross profit expressed as a percentage of sales.
Despite this simplicity, there are a number of points
to consider:
• Sales and cost of sales should exclude any sales taxes
(e.g., VAT)
• Cost of sales should include all costs incurred getting the
product for sale, e.g., inbound shipping
Gross margin is important as a percentage of sales and
as an absolute dollar amount. Percentages as a margin
performance measure can be used and interpreted in
misleading ways because they give no sense of the
volumes of business done. For example, in the scenario
below it would be easy to focus on the Gross Margin %
achievable with the new entrant and to neglect the
Market Leader.
However, the result would be to wipe out gross profits of
$500,000, profits which will be very difficult to replace with
sales of the other brands, and which are essential in a
distribution business to cover a set of relatively fixed
overhead costs. The challenge for distribution is in finding
the right balance between gross margin % and absolute
dollar amount: running the business against gross margin
% targets alone will leave the distributor in the same
situation as one of the consumable distributors, who did
precisely that and ended up turning down so much
“unprofitable” business that they did not generate enough
gross profit dollars to cover their overhead costs.
• Cost of sales should also include any work done on testing,
configuration, assembly and packaging
Comparison of Gross Margin %
and Gross Margin $ Earned
on Different Brands
• Discounts, rebates and other price reductions from the
vendor reduce cost of sales (and consequently increase
gross margins)
• Where there is a write-down of inventories for shrinkage,
obsolescence, etc., the cost should be added to the cost
of sales as soon as the loss is recognized
15
• Discounts given to customers reduce sales and therefore
reduce gross margins
10
• Early payment discounts, in theory, should not be
factored into sales or cost of sales. However, in some
instances these are a significant portion of the profitability
of the product and so are deducted to give a more
accurate picture.
500k
20
400k
300k
200k
5
100k
New
Entrant
B
Brand
C
Premium Market
Brand Brand
Leader
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Margin Mix or Blended Margin
With a portfolio of vendors and products to manage,
the margin performance of the distributor is driven by
thousands of individual margins, both % and dollar. The
overall gross margin is therefore an average, weighted
by sales volume, and the key to successful margin
management is understanding the make-up of this blended
margin or margin mix.
In the example below, the blended margin is 7.6%
($34,900/$461,000). If our distributor is looking to improve
this number, they have a number of options:
• Reducing sales of low-margin products D and E.
However, even though these two products have lower
percentage gross margins, they generate $21,900 of
gross profit or “money margin”
• Increase sales of products A, B and C, which would
increase gross profits as well as improve the
blended margin
• Add a new, higher margin product into the mix. As long
as the gross margin is higher than 7.6%, this will increase
the blended margin
• Increase sales prices or negotiate lower buy prices on
any of the products in the mix
In practice, the lower-volume categories and products are
likely to be less price-sensitive because they are not
price-referencing products. Consequently, some smart
portfolio pricing – differential pricing within and across
categories which shifts prices up on SKUs that are less
price-sensitive – can allow the distributor to improve the
blended margin. A classic example might be the
opportunity in “attach” sales of accessories to high-volume
products such as laptops: driving attach sales of high
percentage margin items such as cases, mice and other
accessories can add significant revenues and “money
margin” to the sale, and will enhance the blended margin.
Another key driver of margin mix for distributors is their
sales management policies. In most distributors the sales
teams will have a set of discretionary discounts which can
be applied based on order size, loyalty or customer
spending power. The sales teams will fully use these to
maximize sales, but potentially give away 1% or 2%
discounts without being aware of the scale of impact those
discounts can have: in a typical broadline distributor
making net margins of close to 1% they are effectively
giving away the total net profit!
From a vendor perspective what counts here is how you
affect this blended margin. Does your portfolio of products
improve or dilute the blended margin? Which products
deliver most gross margin % and which deliver most
“money margin?” Will the new products you are introducing
improve the blended margin?
Example of Blended Margin Calculation
Product
Sales
price
Cost
price
Gross
margin
Gross
profit/unit
Volume
Sales
revenue
Gross
profit
A
$500
$450
10.0%
$50
100
$50,000
$5,000
B
$400
$352
12.0%
$48
50
$20,000
$2,400
C
$350
$322
8.0%
$28
200
$70,000
$5,600
D
$300
$279
7.0%
$21
500
$150,000
$10,500
E
$180
$168
7.0%
$12
950
$171,000
$11,400
$461,000
$34,900
Total
7.6%
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Contribution Margin %
Contribution margin % =
Sales – Cost of sales – Variable costs
X 100
Sales
Margins – From Gross to Contribution
Gross Margin is a very crude measure of performance,
which does not take into account the range of marketing
and selling activity required to sell different brands or
products, or the funding and investment each vendor may
provide into the distributor. Likewise, there are some costs
for a distributor over which vendors have no influence and
which would generate unfair/inaccurate comparisons at
Net Margin level.
Consequently, it is important to quantify the “adjusted” or
“contribution” margin/profit to get an accurate picture of the
relative profitability of vendors, products and customers
(see chart below).
All distributors will have different ways of calculating this
Contribution Margin, and indeed some will strike series of
Contribution Margins, working down the income statement
to include additional factors, costs and savings (see
example contribution statement on next page). For some,
financing costs would be excluded from this calculation,
although differences between vendor and customer T’s &
C’s will clearly have an influence over financing costs.
This picture of contribution margin is essential for
distributors’ analysis of both vendor product portfolios and
customer portfolios. Detailed analysis of customer
contribution can completely change perspective on the
business, as the example on the next page shows.
Contribution Margin %
Customer
Gross Margin
Marketing driven costs
Sales driven costs
Logistics driven costs
Co
Inventory driven costs
st
to
ser
Transaction driven costs
ve
Finance driven costs
Customer
Contribution
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Some distributors will look to complete the picture by
allocating all their costs to the vendor – both variable and
fixed – to arrive at a Net Profit value for each vendor
and/or customer (See example profitability analysis).
While this can be informative for the distributor, it is
important to recognize that the results are entirely
dependent on the basis for allocating fixed costs to
vendors and customers. As such, this metric can be
unhelpful to vendors, particularly as many of these fixed
costs will lie outside the vendor’s influence.
Example Contribution Statement
Negative Contribution
One smaller national IT distributor was highly
successful in sales terms but was struggling to
make an operating profit, with cash flow sinking to
the point that put the business at risk.
Analyzing contribution profit by customer showed
that the distributor’s largest customer – more than
25% of its sales – was making a negative
contribution: effectively the distributor was paying
for the privilege of serving the customer! Examining
the cost drivers, the distributor team saw that a
combination of extended credit terms, multiple
ship-to points, and extensive pre-sales support
were hitting contribution.
The customer was invited to modify its demands
or accept that it should pay for them – a request
that it refused. The management team took the
tough decision to terminate the trading relationship,
switching sales, management and other resources
on building up more profitable customers and finding
new ones. Within months, the profitability and cash
situation improved.
Within six months, the terminated customer returned,
requesting supply of a portfolio of products it had
struggled to source elsewhere on new terms,
eventually becoming one of the more profitable
customers in the portfolio.
Example Customer
Profitability Analysis
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Operating and Net Margins
Contribution margin takes account of the variable costs in
the cost structure, leaving the fixed costs – the costs which
do not vary directly with unit volume. Clearly these need to
be less than the contribution profit if the business is to
realize a net profit. Fixed costs tend to be related to
infrastructure elements such as warehouses, storage
racking, IT systems, call centers and payroll.
Distributors track both the total and the individual cost
elements as a percentage of sales, with the expectation
that this percentage will go down over time, as the
business grows and achieves economies of scale.
However, it is important to recognize that the rapid fall in
ASPs (average selling prices) in the technology industry
mean that to maintain or grow revenues technology
distributors need to put significantly greater volumes of
product through their businesses, which in turn put their
infrastructure – and therefore cost structure – under
pressure. More units will mean more orders, more picking
and packing, more invoicing and administration, but for the
same amount of revenue. Consequently two key measures
your distributors will track are average order size and the
average cost of processing an order. Options to improve
these measures include up-selling customers to bigger-ticket
items and cross-selling additional products, in both cases
generating higher revenues and gross profits from the
same transaction … and the same transaction cost.
The other approach to improving the cost efficiency of the
distributor model is to invest in automation and to seek
greater efficiency through scale. In both cases, there is a
law of diminishing returns, where once major investments
have been made and efficiencies secured, additional
investments will often not generate sufficient additional
efficiency relative to their cost.
Most of the leading IT distributors have already been
through several cycles of investment in automation, and
their cost structures are as efficient as distribution in any
other industry – often more so. This investment has paid
dividends for all parts of the industry over the recent
downturn, as GTDC benchmarks demonstrate.
Once fixed costs are deducted, we are left with an
indication of the overall level of profit made from the
business. Even here, as with gross margins, it is important
Controlling SG&A
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
IT distributors successfully managed expenses during the downturn – reducing SG&A
as a percent of sales by 20 basis points in 2010 and 140 from 2002.
Source: GTDC Research
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to be clear on which net margin is being used: there are
several profit lines struck in the income statement which
can be used to calculate net margin (operating margin, net
margin before tax, net margin after tax), quite apart from
variations in terminology (profit, income, etc.).
In our A Disti Co example, the operating margin is
$56m / $19,316m = 0.28% and the net margin is
$44m / $19,316m = 0.23%.
This shows that A Disti Co is trading close to break-even,
i.e., the volume passing through the business is generating
just enough gross profit to cover the overheads – or, more
accurately, just enough contribution margin to cover the
fixed costs. Viewed in isolation, this is not good. The
slightest problem in operations, or even a change in
interest rates, can push the business into a loss. With
overheads in distribution relatively low, there is little scope
for reducing them to increase profit, so the only real
strategies are margin improvement and sales growth. Of
course, with history we might consider that any profit for A
Disti Co is good news, if the business has been losing
money for years.
Typically internal management teams at your distributor will
focus on operating margin since it excludes interest costs,
driven by a capital structure to the business which is
outside of their control. At an executive level, the focus
may be more on pre-tax net margin, which allows
performance comparison with competitors and industry
benchmarks, and also, importantly, factors in changes in
interest rates and in the cost of capital (for what is a
capital-intensive business).
Operating Margin %
Operating margin % =
Sales – Cost of sales – Overhead costs
Sales
X 100
Net Margin %
Operating margin % =
Sales – Cost of sales – Overhead costs – Interest
X 100
Sales
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Working Capital
Managing the three components of working capital – inventory,
receivables and payables – is of paramount importance to distributors.
Do you operate with a full appreciation of these elements and how your
business decisions impact them?
Working capital is the capital needed to fund the
cash-to-cash cycle in your distributor, i.e., the time taken
from the point cash leaves the business to purchase
product from vendors to the point at which customers pay
the invoice for the product after whatever period of credit
they have been given. Managing the three components of
working capital – inventory, receivables and payables – is
of paramount importance to a distributor, and the whole
emphasis is on velocity.
How quickly working capital can be converted back into
cash determines how much capital is needed, so
measurement in this area focuses on converting financial
amounts into days: how many days the vendor allows the
distributor before they pay for the products, how many
days the products will be in inventory, and how many days
the customers take to settle their debts. Putting all these
elements together determines how long the distributor
takes to cycle its cash through the business.
The Working Capital Cycle
Purchase products
Sell on customer credit
terms – collect cash
when dunned
e.g. 43 days DSO
Working
capital
e.g. 34
days
Purchase on supplier
credit terms – pay cash
when required
e.g. 46 days DPO
Store/warehouse
products
Sell products
Hold sufficient stock to cope with
fluctuations in demand & to cover
supplier order-to-delivery time
e.g. 31 days DIO
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Working Capital
Prompt Payment Discount
Many vendors will offer distributors incentives to pay early, with terms such as “2 percent 15, net 45” providing
for an additional 2% discount if paid within 15 days. On the surface this looks attractive: 2% for paying 30 days
early equates to an interest rate of 24.3% (2% x 365/30). However, distributors will also look at two other
factors: the market and working capital.
In terms of the market, if all competitors are taking this discount and factoring it into their pricing, it may
effectively be a trade discount: the distributor really has no choice if it is to remain competitive, and so takes
the discount and factors it into its gross margin.
In terms of working capital, paying early sucks 30 days of working capital out of the business, which could
have a much higher cost: the distributor is constraining sales in its business by 30 days worth of trading.
Assuming $3.65m of sales with this supplier, the critical factor will be contribution margin:
At a 10% contribution margin, then 30 days sales is a contribution profit of $30,000 ($3.65m x 30/365 x 10%).
Compare this with the value of the prompt payment discount of $65,700 ($3.65 x 90% x 2%) and early
payment makes sense
At a 20% contribution margin, 30 days lost sales is $60,000 of contribution profit, versus prompt payment value
of $58,400 ($3.65m x 80% x 2%), so the lost sales are worth more.
Vendor Credit
Inventory
Taking each element in turn, the time taken to pay
suppliers is termed days payable outstanding (DPO) or
sometimes “supplier days” or “creditor days.” It shows the
accounts payable as a proportion of cost of goods, then
expressed as a fraction of the year.
Once products are purchased, they go into the distributor’s
inventory waiting to be sold to customers. The time they
spend in inventory is known as inventory days or days
inventory outstanding (DIO), and is calculated in a
similar way.
For our example A Disti Co distributor, the DPO is
$1,550m/$18,308m x 365 = 31 days
Note that Cost of Sales is used, since both inventory and
cost of sales are valued at cost. For our example A Disti Co
distributor, the inventory days value is $1,408m/$18,308m
x 365 = 28 days.
What does this mean? It makes sense to answer the
question by comparing this number with standard vendor
terms, and with the number for previous periods. In the
first case, it shows that DPO is pretty close to standard
vendor payment terms, although we should bear in mind
that this is a blended number across a range of vendors,
some of which could be offering longer terms and other
attractive prompt payment discounts. In addition, there
may be regional and country variations in payment terms.
In the second case, we do not have a previous value to
assess trend, but if there were any sudden changes in
DPO it would be important to understand the reasons.
Days Payable Outstanding (DPO)
DPO =
Accounts payable
Costs of Sales
X 365 days
This means that, on average, the inventory is spending just
less than a month in the warehouse. Is this good or bad?
First, it is important to remember that the distributor is
holding the inventory to be able to offer availability when
the customer requires it – if inventory days are too low they
risk a “stockout” and either the cost of a back-order or a
lost sale. If supply is stable and product can be obtained
from suppliers within a few days of placing an order, the
distributor only needs to carry enough inventory to cover
sales in the period between order and delivery – plus a
Inventory Days (DIO)
DIO =
Inventory
Costs of Sales
X 365 days
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Working Capital
safety buffer. However, since breaking bulk is also a key
value for vendors, they will want to ship in bulk, which for
slower-moving items will inflate the levels of inventory at
their distributor. Clearly, too, inventory will be influenced by
the nature and geography of the markets the distributor
operates in, with distributors further from the vendor’s own
warehouses and in markets with less-developed
infrastructure needing to factor in a longer – and possibly
more volatile – supply chain.
Second, this value is an average, which can hide a wide
range of different inventory levels. IT distributors use
sophisticated systems to match inventory to volumes sold
(“run rate/rate of sale”), fluctuations in demand, minimum
order quantities and reliability of supply. They will also
classify products into bands e.g., from A to E, where A
denotes fast-moving products with frequent replenishment
while E denotes items such as service parts and spares
which are stocked as a service to customers. In the
fast-moving IT industry, this clearly presents some major
challenges in matching product lifecycles to bands and
stocking levels. Once again in inventory Pareto’s 80:20
rule applies, which can mean that most of the inventory is
held in the 80% of products which account for 20% of
sales, a situation encouraged by vendors offering full
range stocking allowances.
Customer Credit
Once products are sold to customers they leave inventory.
For a cash sale, that would be the end of the cycle, but
since a key role of the IT distribution channel is the
provision of credit most sales generate a receivable
balance. The time customers take to pay this is called
days sales outstanding (DSO) or “customer days” or
“debtor days.” The calculation shows the average
receivables balance as a proportion of sales, expressed as
a fraction of the year.
In contrast with DPO and DIO, accounts receivable and
sales are both valued at sales prices (not cost of sales). For
A Disti Co, the DSO is $1,897m/$19,316m x 365 = 36 days.
On average then, A Disti Co’s customers are taking just
over 5 weeks to pay for their products. As with DPO, we
can compare this number with the distributor’s standard
customer credit terms, with previous values, and
benchmark against other (comparable) distributors in the
marketplace. Once again, too, this value is an average,
Days Sales Outstanding (DSO)
DSO =
Accounts receivable
Sales
X 365 days
so it is important to understand how it is made up: different
customers or sets of customers may have different terms.
It is also important here to recognize that when vendors
request and incent distributors to develop specific markets
and segments, this can have a major influence on DSO:
different countries will have both different standard terms
and different business cultures regarding adherence to
terms; resellers who service the government and public
sector will typically require longer terms since they
themselves will be waiting longer to receive payment for
projects; and any distributor who services the retail market
will be able to share some of the horror stories around DSO!
Working Capital Cycle
Putting these three elements back together gives us the
working capital days: DIO + DSO – DPO. In the case of A
Disti Co, this means a working capital cycle of 28 + 26 – 31
= 33 days. In other words, it takes just over a month for A
Disti Co to cycle its cash through working capital and back
into cash. Another way of thinking of this is how frequently
A Disti Co turns over its working capital in a year – its
working capital turn.
The faster the working capital turns, the less cash is
needed to finance the operation of the business. As the
“Free cash!” example on the right shows, small
improvements in each element of the working capital
equation can lead to significant changes in the efficiency of
the business, and reduce the cash needed to finance it.
In some cases – rare for IT distributors – working capital
days can be negative e.g., DIO of 25 + DSO of 35 – DPO
of 75 = working capital days of minus 15. The distributor
may have focused on fast-moving products, avoided bad
customers and negotiated extended terms with its vendors.
What does this mean? It means that the distributor has 15
days’ sales worth of cash in the business – a “cash float,”
which can earn interest and, in turn, can boost profits or be
factored into pricing to win more business.
More typically, however, there are additional elements
which need to be factored into the distributor’s working
capital requirement and cycle: vendors may run promotions
or marketing campaigns where the distributor is expected
to advance funds on their behalf, before claiming them
back later. Likewise, vendor rebates and debit notes also
absorb further cash and slow down the cycle.
Working Capital Turn
Working capital turn =
365 days
Working capital days
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Working Capital
Reductions in Working Capital Free Up Cash…
Free cash!
In this example, our distributor has sales of $20m and a cost of sales of $19m. By improving each element of
working capital by 5 days we can reduce the cash required by nearly 40% (from $3.25m to $2.45m), freeing
up $0.8m of cash for reinvestment in purchasing product.
Working Capital
Component
Days
Starting Point
Days
Value $
Improved profile
Days
Value $
Improvements
Days
Value $
Inventory
DIO
40
2.08m
35
1.82m
-5
0.26m
Receivables
DSO
45
2.47m
40
2.19m
-5
0.28m
Payables
DPO
-25
-1.30m
-30
-1.56m
-5
0.74m
60
3.25m
45
2.45m
-15
0.8m
WC Days
WC Turn
6 times a year
8 times a year
Even more significant is that this cash can be run through the new, more efficient business eight times a year,
meaning the potential for additional sales of $0.8m x 8 = $6.4m, a growth rate of over 30%.
What Does This Mean for Vendors?
As we have seen, capital is vital to distributors, and its
major operational element is working capital. Vendors
must therefore understand the impact of their value
proposition on the distributor’s business, not just in terms
of profitability but also in terms of each element of working
capital. Quite apart from standard terms and business
practices (prompt payment discounts, range stocking
requirements, rebates, etc.), it is important to recognize
that even within one vendor portfolio, the choice of focus
markets, categories and customers can create major
differences in the business model. Asking a distributor to
support you in a developing market with a long and
unreliable supply chain by addressing resellers who
service government projects incorporating complex product
sets is likely to bring very different challenges – and a very
different working capital profile – from asking them to
support you in a mature market, close to your distribution
hub, selling standard run-rate products through resellers
who pay in line with agreed credit terms.
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Are the odds “SKU’d” in your favor? Delve into the pluses and
minuses on this front based on the portfolio of products you offer
and where they fit from distribution point of view: Winners, Traffic
Builders, Sleepers or Losers.
.
Margins – whether Gross, Contribution, Operating or
Net – are all measures of Return on Sales. Given the
capital-intensive nature of distribution, it is essential to
understand how vendors contribute to the capital – and in
particular working capital – dynamics of a distributor.
As a first step beyond profitability, it is important to
understand how the inventory turn performance of a
vendor’s products may complement its margins. The
measure of GMROII (Gross Margin Return On Inventory
Investment) includes both Gross Margin and Inventory
turns, and so allows a comparison of products, which may
have a range of margin and turn characteristics. Where
contribution margins are available, the contribution
equivalent CMROII can factor in both vendor contributions to
covering fixed costs and the turn rate of the vendor products.
GMROII/CMROII analysis can also be used to generate a
portfolio view of the business or a part of the business:
mapping the “Earn” dimension on one axis and the “Turn”
dimension on the other provides a wealth of insight into
how different vendors, categories and SKUs perform …
and how they drive overall performance. Products can be
categorized and managed differentially to optimize overall
performance. In the example, performance of each SKU is
plotted on the grid, and the SKUs are categorized:
Gross Margin Return on Inventory Investment (GMROII)
GMROII =
Gross profit
Inventory
=
Gross profit
Sales
“Earn”
X
X
Sales
Inventory
“Turn”
Contribution Margin Return on Inventory Investment (CMROII)
CMROII =
Contribution profit
Inventory
=
Contribution profit
Sales
“Earn”
X
X
Sales
Inventory
“Turn”
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• Winners are high-margin, high-turn SKUs. Focus is on
establishing why they perform so well and on maintaining
their performance.
• Sleepers are the most interesting products, since they
have high contribution potential for small increments in
sales. Some may be products early in the lifecycle, which
will respond positively to sales stimulus. The greatest
opportunities lie in connecting sleepers to traffic builders,
and analysis of connect rates can show where these
opportunities lie (and the value of additional connect).
• Traffic builders – products with high turn but low
contribution – tend to be strong brands which customers
buy in volumes, but which distributors need to price
aggressively to establish price positioning and maintain
their competitiveness.
• Losers are those SKUs which drag down contribution
and turn slowly. These SKUs need to be reviewed
regularly and action taken to address the poor performance.
Product Portfolio Profiled in Terms of
“Earn” and “Turn” Characteristics
20
Sleepers
Winners
18
Contribution margin %
16
14
12
10
Losers
8
Traffic builders
6
4
2
0
0
100,000
200,000
300,000
400,000
500,000
600,000
Volume $
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Adding into this equation the effect of a vendor’s payment
terms (and potentially even reflecting some better-quality
customers who pay more promptly and who are brought in
by the vendor) secures a view of GMROWC (Gross Margin
Return on Working Capital), i.e., how many Gross Profit
dollars are generated for each $1 invested in working
capital. This is the best overall measure for product and
category managers since it is usually easily available and
factors in most of the major economic elements.
Going one step further, using whatever level of contribution
margin is available can allow you to measure Contribution
Margin Return on Working Capital – probably the best
guide as to product or vendor profitability as it builds in all
dimensions of its economic performance.
Some distributors will work to take their vendor analysis
still further – ultimately to Net Profit After Tax Return on
Working Capital, since this also captures the extent to
which the vendor is contributing to covering their fixed
costs. As alluded to earlier, though, such analysis presents
two major challenges:
• the basis of allocation – or “key” – for the fixed costs
across vendors (or indeed customers). This key is tough
to define: it varies by cost type, is tougher to agree on,
and is always open to challenge.
• the degree of control a vendor has over drivers
diminishes significantly once analysis goes beyond \
contribution: like all metrics, if we are looking for
improvement it is always better to limit measurement to
elements that the vendor can truly influence.
Gross Margin Return on Working Capital (GMROWC)
GMROWC =
Gross profit
Working capital
=
Gross profit
Sales
X
Sales
Working Capital
Working capital = Inventory + Accounts receivable – Accounts payable
Contribution Margin Return on Working Capital (CMROWC)
Contribution profit
CMROWC =
=
Working capital
Contribution profit
Sales
X
Sales
Working capital
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Distributors use a number of top-level metrics to measure both their
own business and the contribution of vendors to their performance.
Where are you in the mix? Do you know the success formulas and
how they can yield more ideal results?
Distributors use a number of top-level metrics to measure
both their own business and the contribution of vendors to
their business. The way they label these varies from
distributor to distributor, which can be confusing, so it’s
essential to clarify how a given distributor is calculating a
given ratio.
The key ratios you should be aware of are as follows:
RONA measures the return on the assets employed in the
business, so it‘s useful when comparing distributor
business units, subsidiaries or divisions.
ROCE measures the return on all the capital employed in
the business, so is used by investors when comparing
investment in the distributor with other opportunities.
ROIC is seen by some top distributors as a more precise
measure for management targets and incentives. ROIC
focuses on the operating components of the business
model and relates them to the relevant portion of
shareholders’ funds. Note that the top line is Net Operating
Profit After Tax, but should be without interest deducted.
Return on Net Assets (RONA)
RONA =
Operating profit
Cash + Working Capital + Fixed Assets
Return on Capital Employed (ROCE)
ROCE =
Net profit after tax
Total assets – Non-interest bearing liabilities
Return on Invested Capital (ROIC)
ROIC =
=
Operating profit after tax
Invested Capital
Net profit after tax + interest
Total assets – excess cash – non-interested bearing current liabilities
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Value Creation (VC)
VC = Operating profit after tax – (Invested Capital X WACC)
Value Creation – also labeled Economic Profit or Economic
Value Add (EVA) – recognizes that management teams’
task is not just to make a profit, but to make a profit in
excess of the cost of the capital they used to make a profit.
By adding the cost of capital (technically the Weighted
Average Cost of Capital or WACC) to the equation, it is
possible to establish a dollar value, which is both more
intuitive than a percentage and can reflect the scale of
the business.
It is also possible to build a map of the business model of a
distributor in the form of a VC “tree,” showing how changes
to the business model have an impact further up the tree to
impact Value Created or Lost. As an example, the chart on
the next page shows the performance of our distributor – A
Disti Co – with the lower figures for each metric showing
Year 1 values, and the upper showing Year 2 values.
The last point to note with these more sophisticated
measures is that a vendor only has an influence on a
limited number of components within the distributor’s
business. In reality, a full analysis of CMROWC covers
most of the tangible ways in which vendors can influence
these metrics.
Different Measures for Different Stakeholders
Measure
Used for
Used by
Stock Price/
EPS
Valuing the business & evaluating future prospects
Current & prospective
stockholders
Value
Creation &
ROCE
Assessing the performance of the business as an
investment
Investors
RONA
Assessing the operational performance of a Business
Unit, Subsidiary or Division (which has a discrete set
of Assets)
Senior Management
ROIC
More precise measure for setting targets and incentives:
focuses on the operating components of business model,
and on relevant portion of shareholders’ funds
Senior & Operational
Management
CMROWC
When correctly scoped*, should include all aspects of
performance which a vendor can influence in their
contribution to the ROIC
Operational/
Product Managers;
Vendors
*All metrics
Are closely linked and can be calculated in different ways from those set out here.
Should hold people accountable for the parts of the business model they can influence.
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A Disti Co Example of How Business Model
Changes Impact Value Creation
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Managing Growth
It’s a good problem to have – do you already have it or wish that you
did? Zero-in on a simple way to quantify how the size, profitability
and working capital efficiency of a business can determine how much
growth a distributor can finance from its own resources.
Internal Financing of Growth
From a vendor perspective, it is important to understand
how well the distributors in the channel can finance
growth: whether to assess the capacity of the channel to
grow the vendor’s business, or to understand what the
vendor could do to improve their contribution to the
distributor’s growth. There is a simple way to quantify how
the size, profitability and working capital efficiency of a
business can determine how much growth a distributor can
finance from its own resources.
This potential growth capacity can be calculated as shown
in the formula below.
Potential Growth Capacity %
Potential growth capacity % =
Net margin after tax % X Working Capital turn
In other words, the maximum growth achievable if a distributor
applies all the profits it generates to funding increased
working capital, which in turn supports increased sales.
Beyond this growth, the distributor – like any business – is
obliged to seek other sources of capital: either its own (finite)
cash and reserves or external capital (along with the
associated constraints and scrutiny). The alternative is, of
course, additional support from vendors: they should be
looking for ways they can contribute to improved net
profitability and/or improved working capital turn. An effective
growth partnership is therefore based on a win-win approach,
where incremental profits are shared between the partners.
Clearly, vendors who deliver better-than-average
Contribution Margins and better-than-average Working
Capital, are net contributors to the growth capacity, i.e., a
“growth engine” relative to their competitors, and will be
viewed more favorably.
Economies of Scale – Growth and
Step Changes in Costs
The other dimension to growth is the economies of scale a
distributor can secure through growth, which allow fixed
costs to be spread over a larger volume of business. As
highlighted in the margins section, many of a distributor’s
costs are fixed costs – which could be more accurately
described as “stepped” costs: as investments in additional
capacity are made, these costs increase in steps. The key
to realizing economies of scale is to ensure that capacity is
fully utilized before incurring costs in increasing it.
Compare the following two charts (on the next page),
which – in a simplified picture of a real distributor’s
business – map steady volume increases and smooth
contribution increases to stepped increases in fixed costs.
In the first chart, the distributor management team has a
business that fluctuates above and below break-even: each
time it moves into profit for a period, management invests
in increased capacity, swinging the business back into a loss.
In the second chart, the management team operates a
delayed investment strategy, waiting until after revenue
growth has increased contribution before making further
investments in capacity. The result is that the distributor
remains in profit – although no doubt under considerable
stress when running at maximum capacity!
Bear in mind that such systems investments can also have
a significant impact on ROIC: sales systems can drive the
productivity of sales teams, reseller-badged websites can
attract new customers and drive sales with existing
customers, automated warehousing and inventory
management systems can drive inventory turns higher
without risking stockouts, invoicing and credit collection
automation can improve DSO, while payables systems can
ensure that all credit notes are claimed, that DPO is
optimized and that promotions are exploited to the full.
For the distributor’s management team, therefore, getting the
timing of such investments right can be the difference between
major competitive advantage (delayed but right timing) and
years-long disadvantage (investment delayed too long).
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Managing Growth
Profile of How Contribution Margin and
Fixed Costs Interact as Sales Increase
$
Sales
Net losses
Contribution after
variable costs
Fixed costs
Net profits
Volume (Units)
Profile of How Contribution Margin and
Fixed Costs Interact with Delayed Investment
Sales
$
Net losses
Contribution after
variable costs
Fixed costs
Net profits
Volume (Units)
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Begin with knowing your distributor’s strategy, value proposition
and most important metrics they routinely evaluate. See definitive
examples that can increase your company’s value in distribution
and vice versa.
This primer has looked at all aspects of the distributor
business model, but from a vendor perspective the key
question will be: “How does all this help me sell more to
the distributor?”
First, in reality you are selling through the distributor, i.e.,
securing their agreement to list your products and to act as
a route to market for you. You may want the distributor to
perform some or all of the activities listed in Section 2 on
your behalf. You will certainly want the distributor to focus
on your products and actively promote their sale through
whatever combination of market access, education,
product management, marketing, promotion and
competitive selling is required.
Second, the most successful sales operate through
partnerships that deliver win-win results for both parties.
So how do you build the business case?
Understand Your Distributor’s Strategy
Effective planning starts with your customer. Take time to
understand their business objectives, their challenges,
their pain points, their weaknesses and threats. Most
distributors are happy to share their objectives and the
strategy by which they plan to achieve them. Asking the
right questions will highlight where there is mutual
opportunity: customers switching business to competition,
categories not delivering the promised growth, markets
next on the priority list, and – particularly for publicly quoted
partners – business metrics which are under pressure.
Make Your Value Proposition Relevant
We have established that the distributor’s business is all
about earning and turning, about Contribution Return on
Working Capital, about Return On Invested Capital, Return
On Capital Employed and Economic Profit. It is essential to
understand how your value proposition fits into this picture.
Your product features are only interesting if they drive
higher end-customer demand and sales; your marketing
spend on awareness and brand preference may only count
when translated into lower sales costs as the product is
bought rather than sold; you may be able to propose higher
margins on your products through exclusivity or lower costs
by funding resources in the distributor; you may have
options for consignment stock and extended terms which
completely change the working capital equation; the only
part of your channel strategy which counts may be the fact
that you do not have a direct sales force competing with
the trade. All of these elements may need to be built into
the value proposition you put forward.
Find Out Which Measures Matter…
and to Whom
Throughout this guide we have seen how many variants
there are on the measures that matter, the labels used for
them, and the roles within your distribution partners who
are focused and targeted on them. Different partners focus
on different metrics: your task is to find out which specific
measures are relevant to your partners and how they are
calculated so that you can present your value proposition
and business case to maximum advantage.
The example on the next page shows a simple distributor
scorecard, illustrating the range of operational measures used.
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Make the Business Case
Every business argument you make needs to be customized
to your partners and to the business situation. However, it
is possible to outline some simple rules-of-thumb to get
you started:
If you are market share leader
• Focus on gross profit dollars that you as a market
share leader, or your market-leading product, can generate
from your high unit sales – even on a low gross margin %.
Your distributor will recognize that these safe profit dollars
are valuable in covering a significant proportion of fixed
overheads. This can be illustrated graphically as shown
in chart below.
• Focus on contribution margins (% and $) rather than
gross margins. The costs of selling your product should
be lower than those for a lesser-known, less-promoted
brand. Communicate and align your end-customer and
second-tier marketing to your distributor so that the
theoretical benefits of your market leadership are turned
into real sales, reduced selling costs, and solid
contribution profits.
• Shift the focus from return on sales (margins of all
types) to return on assets/capital. With high volumes,
strong $ profits and fast inventory turns, Return on
Working Capital should be above average.
If You are a Smaller Vendor or a
New Entrant in a Category
You will be challenged to secure senior management
attention, so you need to show you can improve the
operational measures for your product/category manager:
• Focus on gross margin %, and drive up GM% by putting
some of your key, high-margin products in the spotlight,
backed up by focused marketing dollars. Stress the
impact on margin mix of incremental sales of your
products and emphasize and demonstrate your products
are just as low-cost to sell and support.
• Emphasize growth, especially % – which will be easier
starting from a small base.
• Highlight connect/attach opportunities – show how your
products can connect to the traffic-building products and
build sales force and dealer incentives around this.
Illustration: Vendor Gross Profit Contribution to Covering a Distributor’s Fixed Costs
5,000,000
Variable Costs
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
Fixed Costs
2,000,000
1,500,000
1,000,000
500,000
ABC Co Costs
Summary
In summary, if you are looking to engage effectively with
distribution you need to develop a thorough understanding
of your partner’s strategy and recognize that you are
selling a complete business model and channel value
proposition. It has to be a model which creates positive
forces on the distributor’s economics, and to be a
Gross Profit on Supplier
successful vendor you will need to be able to analyze and
explain where, how and by how much you can improve the
distributor’s business model.
You can make use of the insights from this primer to
articulate how your value proposition will drive forward your
joint vendor-distributor businesses, highlighting where and
how it improves the business model for your partner.
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The distributor Value Creation/ Economic Profit tree serves
as a very effective checklist in this domain, as can be seen
in the example below.
measures which will be improved for the distributor in this
example. Selecting the one or two which count for A Disti
Co’s management team is key to securing their attention.
For example, a vendor who identifies Return On Invested
Capital as a priority measure and who focuses on showing
how adding their product line improves ROIC should
secure a positive reaction.
The example shown illustrates how distributor Value
Creation / Economic Profit tree can be used to highlight
vendor impacts – here the effect for A Disti Co of adding
an additional product line. Note that there are eight
Example Impact on a Distributor’s Business Model
of Adding an Additional Product Line
Value creation
Year 2
Year 1
Year 2
Year 1
Net Operating
profit after tax
$78
0.4%
$40
0.2%
$2
-$48
Return on
R
Ret
investe capital
invested
6.4%
6
2.8%
2
Operating profit
Year 2
Year 1
$110
$56
Year 2 $1,090
Year 1 $1,008
Revenue
Year 2 $21,248
Year 1 $19,316
100%
100%
$4,313
$4,129
0.3%
5.1%
5.2%
Cost of Goods
Sold
$20,157 94.9%
$18,308 94.8%
Overheads
Cash
$981
$952
$376
$401
4.6%
4.9%
Year 2
Year 1
73%
72%
GMROWC
GM
Year 2
Year 1
65%
57%
Cash
$434
$423
$376
$401
Inventory
$1,492
$1,408
$2,011
$1,897
GMROII
G
6.20%
6.20%
Fixed assets
Payables
$1,814
$1,550
27
28
Receivables
Year 2
Year 1
WACC
Excess cash &
non int liabs
$3,092
$2,715
Total Assets
0.5%
Gross profit
Invested
capital
$1,222
$1,414
35
36
Other current
liabilities
$902
$764
Payables
$1,814
$1,550
33
31
Working capital
$1,690
$1,755
29
33
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Market access, reach, coverage, channel building…these are
typically the key factors in the value equation for IT vendors. Get
beneath the surface and tap the “new value” of IT distribution.
For many vendors, the logic of using distributors in their route
to market strategy is so well understood that they never
consider any alternative. However, it’s well worth summarizing
the key elements of a distributor’s value to a vendor:
Market Access, Reach, Coverage,
Channel Building
Distributors offer the ability to reach large parts of the
market, or, for specialist distributors, large parts of target
market segments. They have established trading
relationships with very large numbers of partners in the
market, and the right resources and processes to engage
with partners of varying size and market importance. Many
of these partners will not have the resources to work
directly with vendors, especially if they are integrating
across multiple vendors, and they look to the distributor to
provide them with the product support and compatibility
information they need. Distributors hold the information to
filter partners against criteria for channel building and
tiering exercises, and can provide valuable guidance as to
which partners to work with in key deals or projects.
Speed to Market (for Brands & New Products)
Even today, after several rounds of consolidation, most
markets comprise thousands of dealers, resellers, ISVs,
etc. Vendors looking to access and service these partners
find that it takes months or even years to research, select
and appoint the right partners. A distributor can provide the
right partners within days of being provided with the vendor’s
criteria, providing a huge time-to-market advantage.
Even where a new channel needs to be built through
partner recruitment, distributors have the market knowledge,
resources and processes to find, educate and sell potential
partners on the value proposition. They can also help the
vendor fine tune their proposition for the channel. For
vendors new to a market segment, the distributor will add
credibility and the confidence that partners will be able to
access the account services they expect.
Economic Efficiency
partners at very low cost because it can amortize the costs
of its operations over the volumes of hundreds or thousands
of vendors, including the very largest brands. These
economies of scale simply cannot be replicated by one
vendor, so the distributor can offer substantial benefits over
in-house partner operations:
• Lower cost to serve – the costs of warehousing, order
processing, inventory logistics, products support (pre and
post sales), account management, warranty claims handling
and so on are all reduced when outsourced to a distributor.
• Variable cost, not fixed or capital investment – by going
through distributors, all the operating costs become
directly related to unit volumes; in other words, they are
fully variable. An in-house operation would require up-front
capital investment in the physical assets of warehouses,
logistics and related systems before a single product is
shipped to a partner. These investments turn into fixed
costs that would initially be extremely high and only reduce
(per unit) as volumes increase – giving rise to the risk that
the contribution from sales does not cover the fixed costs.
• Balance sheet effectiveness, minimize working capital Each partner served requires a level of working capital
to underpin the trading cycle (inventory and accounts
receivable from credit sales). Depending on the product
category, channel segment and local market practices,
this can range from 30 to 120 days or more. Even at an
average 60 days, that represents one sixth (17%) of the
revenue generated tied up in working capital.
For example, for a $10 million turnover, the vendor would
need to tie up $1.7m in working capital. By going through
distribution, the vendor can reduce this to their standard
trading terms, usually 30 days, and thus halve their
investment in working capital. In our example, this would
release almost $850k of cash. This benefit ratchets up as
the business grows, reducing the need to find additional
investment. In our example, doubling the business would
require another $1.7m of cash if serviced direct, but only
another $850k with distribution. In other words, a vendor
could handle double the business through distribution for
the same amount of cash needed if it went direct.
The distributor is geared up to serve large numbers of
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
Risk Minimization
Distributors have established partner trading relationships,
credit histories, knowledge of the people in the sector and
understand the strengths and weaknesses of their partner
base. They are also close to the ground when it comes to
tracking trends, insights and developments among their
partners (potential mergers, acquisitions, customer gains
and losses, key people moving companies, trading
problems and so on). All this insight enables them to avoid
potential bad debts, inventory obsolescence, VAT
carousels, frauds and other risks and prevent them from
turning into costs and charges that would hit a vendor
hard. On the upside, distributors are well positioned to
capitalize on the opportunities in the market through
ensuring that support and finance is extended to the right
partners that are good bets for accelerated growth, major
customer acquisitions or moves into new technologies or
market segments.
Specialized Services Required by
Different Channels
Each channel has different characteristics determined by
their role in meeting the demand from different market
segments. Distribution has done an excellent job over the
last 10 to 15 years of identifying where there are economies
of scale and effectively enabling partners to outsource
these activities. Vendors looking to go to market through
these channels directly would either need to provide these
capabilities themselves or risk being uncompetitive in their
channel value propositions. Working with distributors
provides immediate access to these capabilities and
provides instant credibility to the channels. Examples of
these specialist capabilities include:
• Logistics for retail – Many retailers required sophisticated
logistics capable of meeting slots timed to 15 minute
intervals with financial penalties for missing the slot, or for
failing to fulfill orders precisely as specified. For retailers
that don’t operate their own distribution centers, they
expect shipments of relatively small quantities to each of
their many hundreds of outlets, all of which have specific
restrictions on access, unloading facilities and times of
operation. Distributors have all these issues logged and
already sorted.
• Configuration and drop shipment for dealers – Many
dealers have outsourced the complexities of configuring
products for individual customers, ranging from simple
software installation up to full imaging of bespoke
in-house systems with security and access protocols. In
addition dealers expect their distributors to handle the
individual drop shipments to specific customers (even to
the desk, not just the office), complete with paperwork
that appears to be from the dealer.
Summary
All the benefits of going to market through distribution can
be quantified in hard economic terms, measured through
improvements to the Return on Capital Employed (ROCE)
of the vendor.
Accelerated market access and sales growth will drive top
line benefits which are multiplied by the profit impact of
economic efficiencies to increase the Return part of the
vendor’s ROCE equation. Leveraging the balance sheet of
the distributor minimizes the vendor working capital
employed in servicing the channel, reducing total Capital
Employed.
The combined impact of both improving vendor returns on
sales while reducing vendor capital employed delivers a
substantial positive impact on the vendor’s ROCE, limited
only by the proportion of business it puts through distribution.
And over the long term, ROCE increases drive long term
market value through stock price improvement.
How Distribution Drives Value for Vendors
Risk Minimization
Increased
market access
Accelerated time
to market
Net Operating Profit After Tax
Total assets – Non-interest bearing liabilities
Reduced Working Capital
Economic
efficiencies
= ROCE
Stock price
Substantial Improvement
Specialized Services Required by Different Channels
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
Nine Things that Vendors Do that Make No Sense to Distributors
1. Variable Cost Discounts by Major Brands
These are discounts that are given per product, so the cost to the vendor varies according to the volume of
product sold. However, this type of promotion costs the same per unit to the smallest brand as to the largest
one. A large brand should be looking to leverage its brand power by making fixed-cost investments that can be
spread over the larger number of units that it sells. Examples include investments in World Cup or Olympic
sponsorships that can be harnessed through tie-in promotions.
2. Constantly Change the Personnel Managing the Relationships
The key word here is relationship and, often, no sooner has a vendor account manager built a relationship with
all the key people inside a distributor than he or she is moved into a new role… and the process begins again.
This is counter-productive, wastes everyone’s time and hampers business building. And the problem is not
limited to account managers, but everyone who is involved in the account-facing team.
3. Keep Fiddling with the Rules for “Pay-for-Results” Programs
“Pay-for-results” programs are attractive to vendors because they are self-financing and attractive to distributors
because they reward effort and performance. However, these programs can be difficult to set up correctly so that
they drive incremental sales by providing the right level of incentive. The result is that vendors are tempted to
make adjustments to fine tune the program as they play out in practice (and find that some elements may be too
generous). Each change has to be communicated, understood and then translated into changed promotional
activity by the distributor, all of which ties up senior management and sales team time. Vendors should hesitate
before making changes to these programs and limit them to only obvious design errors.
4. Set T’s & C’s for the Whole Business that Do Not Recognize the Different
Business Models Involved in Reaching Consumers, SMB and Enterprise
As distributors have become larger and more sophisticated, so the degree of specialization required to service
the very different types of channel partner involved in reaching the end-customer segments has increased. The
different resources, processes and product-types represent different business models for the distributor, with
different costs and financial dynamics. Yet, vendors will often set T’s & C’s that apply to the whole business. One
solution seen is the adoption of Schedules to the main contract, providing for variations in the T’s & C’s with
listings of the products and services that qualify for each.
5. SKU Proliferation
In some product categories, it has become common practice for vendors to add SKUs at a rate that the volumes
sold just do not justify. A quick walk down the aisles of printers will demonstrate this point to good effect: just how
many variations of features and specifications are really needed to serve the market? As so often in distribution,
the 80:20 rule seems to apply, where 80% of unit sales will come from 20% of the SKUs. But this means that
only 20% of the volume will be coming from the other 80% of the SKUs – an expensive and commercially
unjustifiable model.
6. Set Pan-European T’s & C’s
Even after 54 years, the “Common Market” just isn’t common … and there are significant variations across
Europe in the costs of the core activities of distributors – warehousing, logistics, payroll, credit, marketing and
information technology and services. These variations relate to the underlying costs in different markets, market
size and degree of market development. Vendors that look to set pan-European terms and conditions are
ignoring the realities of the market and imposing artificial cross-subsidies between the individual markets, that
both damages their business and undermines their routes to market.
Continued >
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
Nine Things that Vendors Do that Make No Sense to Distributors (Cont.)
7. Appoint Too Many Distributors
Distribution efficiency and cost effectiveness are driven by economies of scale. These economies are undermined
when vendors appoint too many distributors within a market. Of course, vendors want to ensure that they have a
competitive discipline in their distribution model and the capacity in their channel to handle demand and growth.
But the larger distributors now have the diversity of capability required to service different market segments and
handle different product categories, without vendors needing to farm out the business to multiple distributors.
Vendors should constantly check whether they can benefit from consolidating the number of their distributors.
8. Promote Too Many Deals
Perhaps it is the number of program managers employed by vendors, but there has been a trend towards an
increase in the number of deals run in each quarter to stimulate demand. Each deal is a distortion of the business,
affecting order linearity, often requiring a special SKU, sometimes special handling and always clearing out at
the end of the deal period. They tend to be regarded within distribution as quick fixes to compensate for poor
positioning or pricing. The alternative is to plan and execute proper systemic programs that are set up to achieve
specific marketing and sales objectives.
9. Appoint Account Managers That Don’t Understand
the Distribution Business Model
To get the best out of a distributor-vendor relationship, account managers need to understand the financial
dynamics at work in taking their products to market. This helps them to position their channel value proposition
effectively to harness the resources available within the distributor and to articulate the benefits of their programs
and plans. Yet, with a few notable exceptions, many vendors fail to invest in developing the commercial and
financial skills of their account managers to be able to fulfil their role effectively.
For more information on the IT distribution industry, please contact the Global Technology
Distribution Council or the independent authors of this publication at VIA International:
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
GTDC Corporate Office
Global Technology Distribution Council
141 Bay Point Drive N.E.
St. Petersburg, FL 33704
VIA Headquarters
VIA International
Building 3 Chiswick Park, 566 Chiswick High Road
London W4 5YA, United Kingdom
Phone
813.412.1148
Phone
+44 208 899 7333
E-mail
[email protected]
Contacts
Julian Dent ([email protected])
Michael White ([email protected])
Web
www.gtdc.org
Web
www.viaint.com
Read More
Distribution Channels: Understanding and Managing
Channels to Market by Julian Dent (Kogan Page)
ISBN: 978-0749462697
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
GTDC
GLOBAL
TECHNOLOGY
DISTRIBUTION
COUNCIL
www.gtdc.org • www.viaint.com

Understanding the Technology Distribution Business

Transcription

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